A Value-Added Investment: A “for sale†property has high vacancy. Based on its weak NOI and the seller/broker’s valuation, the property has a cap rate of 3% (use this to find current NOI). Because of the risk (empty space), you are only willing to purchase the property at a much higher (above market) going-in cap rate of 12%.
It is your belief that you have found some niche tenants for the property. In the first year, NOI is expected to increase by 200% as the property stabilizes. After that, NOI growth is expected to be 2.5% per year. In five years, you expect the going-out cap rate to be 9%.
If you can pull this off, what IRR do you anticipate on this investment? Value is $1,000,000.
